Annual Report 2016 › Annual Report 2016 Page References

annual report 2016 › Annual Report 2016 Page references

Overview 02 – 17

+ Further information Facts and figures 02 Letter to the Shareholders 04 HOCHDORF share performance 08 ! Important data/fact Business model, strategy and markets 10 Interview: «With the forward integration we are also now responsible for brands» 14

Insight Cereals & Ingredients 18 – 23

HOCHDORF Group Key figures 24 – 26

Financial report 24 HOCHDORF Group key figures 26

Business divisions 27 – 37

Dairy Ingredients 28 Baby Care 32 Cereals & Ingredients 35

Corporate Governance 39 – 50

Group structure and shareholders 40 Capital structure 40 Board of Directors 41 Group Management 46 Compensation, participations, loans 48 Shareholders´ rights of co-determination 48 Change of control and defensive measures 49 Auditor 49 Information policy 49

Remuneration report 51 – 58

Remuneration report 52 Report of the Auditor on the 2016 Remuneration Report 57

Annual financial statement HOCHDORF Group 59 – 89

Annual financial statement HOCHDORF Holding Ltd 90 – 98

Corporate Social Responsibility 99 – 107

Adresses and imprint 108 Stand 14.03.2017

Facts and figures

In 2016 the HOCHDORF Group worked on the implementation of strategy 2016 – 2020. Important elements of this include forward integration and the development and marketing of new high added-value products. With the majority holding in Pharmalys Laboratories SA, HOCHDORF took an important step towards the successful implementation of the strategy. Earnings in 2016 reached record figures thanks to the measures initiated earlier.

The HOCHDORF Group The HOCHDORF Group, which was founded in 1895 and has its headquarters in Hochdorf (near Lucerne) main- tains two milk plants in Switzerland and one milk plant in both Lithuania and Germany (60 % stake). In addition, high-quality infant formula is produced at the Swiss milk plants. Furthermore, HOCHDORF has a cereal plant in Switzerland (processing wheat germ) and an oil mill in Germany. As of the end of 2016, HOCHDORF has a 51 % majority holding in the Pharmalys Group. Pharmalys sells infant formula among other things, under the brands Primalac and Swisslac, in over 40 countries. HOCHDORF is among the leading food companies in Switzerland and at 31 December 2016 had more than 630 employees worldwide. HOCHDORF products contribute towards health and well-being, from babies to senior citizens. The products are sold to the food industry and to the wholesale and retail trade in over 90 countries.

Our strategic objective The HOCHDORF Group is an independent global company operating in the business areas Dairy Ingredients, Baby Care and Cereals & Ingredients. As a Swiss food company we are guided by the Swiss values of «reliability», «quality» and «precision». As a company operating in niche markets, it is HOCHDORF’s aim to keep the agility of a medium-sized company and conquer new markets by showing the necessary courage. The HOCHDORF Group focuses its products on premium markets and offers its customers a correspondingly high standard of service. In the medium term, HOCHDORF is aiming for growth by offering products with high added value such as top quality milk derivatives, infant formula and healthy children’s foods. To improve its earnings figures HOCHDORF is aiming for forward integration in terms of both sales and products.

Financial data

Facts and figures | 01

2 HOCHDORF Annual Report 2016 Stand 14.03.2017

Key indicators in the annual report

Key indicators 2016 2015 2014 2013 Processed milk and whey in tonnes 741,769 761,240 506,963 455,647 Products sold in tonnes 237,054 242,821 99,155 91,699 Total assets (in CHF 1,000) 425,474 340,396 331,109 243,485 Equity ratio 10.80 % 56.60 % 43.20 % 42.60 % Cash flow from operating activities (in CHF 1,000) 24,227 18,134 20,546 18,196 Market capitalisation (in CHF 1,000) 444,417 242,044 147,787 93,600 Share price at 31.12. in CHF 309.75 168.70 138.00 104.00 Earnings per share in CHF 14.12 11.73 17.45 6.95 Staffing levels at 31.12. 633 625 573 362

Market data

Share prices and charts

02 | Facts and figures

Facts and figures 3 Stand 20.03.2017

Dear Shareholders

In this letter to the shareholders, we will address two aspects of the strategy and its implementation › Page 99 et seq. in depth: the acquisition of the majority stake in the Pharmalys Group and the planning and realisa- tion of the investments in Sulgen. Along with the standard content, you will find the sustainability Corporate Social report published every two years at the end of this annual report. We would like to start by report- Responsibility report ing on the solid earnings.

Very good results achieved In comparison to business year 2015, the HOCHDORF Group can present some record earnings for 2016. › Earnings before interest and taxes (EBIT) were CHF 22.5 million or 4.1 % of the production revenue. Page 61 This number is quite impressive for a company that does business in the food industry, mostly in the Income statement business-to-business segment. Five years ago, in business year 2011, the HOCHDORF Group achieved an EBIT of just CHF 1.9 million or 0.5 % of the production revenue. Primarily, Swiss business contributed to the record-high result in 2016. The foreign factories felt the full force of the stormy weather in the milk market due to their product range. In an industry comparison, we have mastered the chal- lenging market situation on the international level quite well, however. The Group earnings of CHF 19.4 million are also at a record level (PY CHF 13.0 million). › Page 96 On account of our success and in light of the major investments, we propose to the Annual Gen-

Proposed appropriation eral Meeting a slight increase of ten centimes in the dividend payout to CHF 3.80. This will let us of retained earnings continue what we consider to be a cautious dividend policy aimed at sustainability.

› Majority stake in Pharmalys Page 32 Forward integration, and thus taking a step closer to the end consumer, is a central part of the strat-

Baby Care report egy set at the beginning of 2016. This step is important for a sustainable improvement in the earnings of HOCHDORF. After intensive negotiations, we signed the contract on 25 March 2016. On 19 December 2016, the contract was finalised after an extraordinary Annual General Meeting and the › fulfilment of additional mutual closing conditions. As a result, HOCHDORF Holding Ltd has acquired Page 41 a 51 % stake in Pharmalys Laboratories SA and the jointly formed Pharmalys Africa S.à.r.l. The investment in Pharmalys Tunisie S.à.r.l. will start at 49 %. HOCHDORF will acquire the remaining Group structure 2 % after completing an «approval process» by the state of Tunisia.

For the financing of the majority stake, HOCHDORF Holding Ltd will issue a three-year mandatory ! convertible bond for CHF 218.49 million at the end of the March 2017. HOCHDORF will provide information about the details of the mandatory convertible bond in due time.

OVERVIEW | 01

4 HOCHDORF Annual Report 2016 Stand 20.03.2017

HOCHDORF in new realms › By taking a step closer to the end consumer, the HOCHDORF Group is not navigating in new waters Page 14 et seq.

from a historical perspective. In its 120 year history, the HOCHDORF Group has repeatedly worked Interview with closer to or farther from the market for end consumers, for example, with the brand Heliomalt or even Thomas Eisenring earlier with the brand Bébé. For us, the integration of Pharmalys means: «Never stop a running engine!» On the market side, Pharmalys must continue to run just as it did before. HOCHDORF’s task is to create more structure in the administrative area, sell existing products that are of interest to the markets through the Pharmalys distribution channels and introduce the business model in new markets. In addition, meaningful reporting systems must be established. The respecitve integration work has been underway since the beginning of 2017.

High performance spray tower line At our location in Sulgen, we have been not only producing, but also building for some time. The high rack storage area has been covered since the end of 2016 and the installation of the technical equipment has begun. To enable us to cover future demand for Swiss-made infant formula, the Board of Directors approved the construction of an additional spray tower line for infant formula › with a performance of roughly 32,000 tonnes and the installation of additional can filling lines and a Page 28 et seq. high rack storage area in Sulgen. The work is being planned, and the handover of the new lines to Report of the three production continues to be scheduled for the first quarter of 2018. The staff required for the line will business areas be recruited this business year and trained at the existing spray tower line.

The project for increasing capacity at the Hochdorf site is running on schedule. The new lines will be available for the coming milk season. In Prenzlau, an investment was made in a higher performance filing line for buttermilk and put into operation as scheduled. In Marbach, the expansion of production capacities was completed this spring.

02 | Letter to the Shareholders

Letter to the Shareholders 5 Stand 20.03.2017

Strategy will continue With the new strategy adopted at the beginning of 2016, the HOCHDORF Group set significantly higher target margins. The forward integration and the product offensive are two important points that must be pursued persistently. In the case of the forward integration, we have decided to move forward with one customer to achieve the goals more quickly. With a majority stake in the Pharmalys Group, we will achieve an important milestone. In the area of the product offensive, we were also able to achieve some success, but must still improve in the future. Above all, the time from development to market, i.e. to sale in stores, must still be reduced significantly.

Change in the Board of Directors I was elected to the Board of Directors of HOCHDORF Holding Ltd for the first time at the Annual General Meeting in 2002. Since 2014, I have been active as Chairman of the Board of Directors for this exciting company. In 14 years, the HOCHDORF Group has changed substantially and I look ! back proudly on the goals we have achieved. In the spirit of the successfully implemented new Strategy 2016 – 2020, however, it is now time to make room for other people on the Board of Direc- tors and for me to step down. I would like to thank you for the confidence which you have had in me and which I was continually aware of during my term in office.

Likewise, Meike Bütikofer will also step down from the Board of Directors at the coming Annual General Meeting. She has used her marketing knowledge and her experience in the area of strategic ! development to support the HOCHDORF Group during her eight years. We would like to thank Meike Bütikofer for the good collaboration and wish her much success and all the best in the future.

The Board of Directors has decided to reduce the board to seven members again. We recommend the election of Ulrike Sailer to the Board of Directors at the Annual General Meeting. She has many ! years of international experience in the areas of marketing, sales and brand positioning and can use her knowledge to support the HOCHDORF Group on the path to getting closer to the end consumer.

We recommend the election of Dr Daniel Suter as Chairperson at the Annual General Meeting on 5 May 2017.

Outlook › Page 10 et seq. The integration of the Pharmalys companies in the HOCHDORF Group will have a substantial impact on the balance sheet and the income statement. International milk markets have also sub- Business model, stantially recovered in recent months. Accordingly, we anticipate fairly stable milk quantities and strategy and markets slightly higher prices. In the current business year, we anticipate gross sales revenue of CHF 635 – 670 million and an EBIT as a percentage of production revenue between 6.1 and 6.6 %.

Without reliable suppliers, without the energetic and reliable dedication of our employees, without customers purchasing our products and without the support of our shareholders, the outstanding results in 2016 would not have been achieved. Therefore, we would like to thank you greatly for the confidence you have shown in us and for your support of the HOCHDORF Group.

Letter to the Shareholders | 03

6 HOCHDORF Annual Report 2016 The strategy of the HOCHDORF Group requires a high degree of dynamism and willingness to change at all corporate levels. The (interim) results that have been achieved attest to the fact that these attributes are actively embraced in the HOCHDORF Group. Stand 20.03.2017 Stand 20.03.2017

HOCHDORF share performance Shareholders according to breakdown at 31 December 2016

Number of shares Registered shareholders Share price development in 2016 1 – 10 225 ! The share price development for HOCHDORF Holding Ltd was extremely pleasing in 2016. The stock 11 – 100 1,025 achieved the second-best annual performance of all the securities listed on the SIX Swiss Exchange. 101 – 1,000 637 › The most noticeable price increase took place in the fourth quarter of 2016. The price at close of trad- Page 3 1,001 – 10,000 93 ing on 30 December 2016 was CHF 309.75 (31 December 2015: CHF 168.70). That represents a price 10,001 – 100,000 17 Share prices and charts increase of +83.6 %, while the Swiss Performance Index (SPI) recorded a zero-sum game over the 100,001 or more 1 whole of 2016. When viewed over the last five years (1.1.2012 – 30.12.2016), the price increase for Total 1,998 the HOCHDORF share amounted to +313 %. As of 31 December 2016, HOCHDORF Holding Ltd had 1,434,760 registered shares (no change over previous year). The market capitalisation also rose accordingly by +83.6 % to CHF 444.4 million (previous year: 242.0 million). Disclosure of equity holdings According to Article 120 of the Federal Act on Financial Market Infrastructures and Market Conduct Share prices and charts in Securities and Derivatives Trading (Financial Market Infrastructure Act, FMIA), anyone who in direct or indirect consultation with third parties acquires or sells on his own account the shares of a Listing company based in Switzerland, the equity holdings of which are wholly or partially listed in HOCHDORF Holding Ltd is listed on the SIX ISIN CH0024666528 Switzerland, or of a company based abroad, the equity holdings of which are wholly or partially Swiss Exchange (ISIN CH0024666528). At the Securities number (VALOR) 2,466,652 listed in Switzerland, and thus reaches, falls short of or exceeds the limit value of 3, 5, 10, 15, 20, end of 2016, the market capitalisation was CHF Bloomberg code HOCN SW 444.4 million. 25, 33⅓, 50 or 66⅔ per cent of the voting rights, whether these are exercisable or not, must dis- Thomson Reuters code HOCN.S close this to the company and to the stock exchanges on which the equity holdings are listed.

Dividend Financial calendar On the basis of the good results and taking into account the major capital investments, the Board of › Annual General Meeting ! Directors is applying to the Annual General Meeting for a dividend payment from capital invest- 5 May 2017 ment reserves of CHF 3.80 per share (previous year CHF 3.70). With the slight dividend increase, a › Dividend payment dividend return of 1.23 % is achieved as at the closing date, 30 December 2016. This cautious and 11 May 2017 sustainable dividend policy will thus be continued. › Half-yearly statement 2017 17 August 2017 The dividend to be paid from capital investment reserves is tax free for natural persons resident in Switzerland who hold shares as personal assets. Key indicators for the HOCHDORF Holding Ltd stock

2016 2015 2014 2013 2012 Shareholders according to category at 31 December 2016 › Share capital at 31.12. TCHF 14,348 14,348 10,709 9,000 9,000 Page 64 Description Registered shareholders Number of shares at 31.12. Units 1,434,760 1,434,760 1,070,922 900,000 900,000 Information about Natural persons 1,837 Nominal value per share CHF 10.00 10.00 10.00 10.00 10.00 significant shareholders Legal entities 91 Profit/loss (–) per share CHF 14.12 11.73 17.45 6.95 –39.69 Pension funds 15 EBITDA per share CHF 23.25 21.23 25.40 20.11 15.91 Insurance companies 4 EBIT per share CHF 15.66 14.04 18.69 11.44 3.07 Investment company/fund 26 Cash flow (earned capital) per share CHF 22.45 17.33 23.63 20.14 15.01 Other trusts 5 Equity per share CHF 31.92 134.37 133.69 115.30 110.85 1) Banks 16 Dividend per share CHF 3.80 3.70 3.70 3.20 3.00 Public corporation 4 Peak price CHF 320.00 178.00 141.30 105.30 89.95 Total 1,998 Lowest price CHF 163.00 107.50 100.80 79.20 66.00 Price at close of trading on 31.12. CHF 309.75 168.70 138.00 104.00 88.25 Average trading volume per day Units 2,650 2,312 1,202 804 940 P/E (price/earnings ratio) at 31.12. 21.94 14.4 7.9 15.0 n.a. Dividend return % 1.23 2.19 2.68 3.08 3.40

1) Proposal of the Board of Directors to the Annual General Meeting.

04 | HOCHDORF share performance HOCHDORF share performance | 05

8 HOCHDORF Annual Report 2016 Stand 20.03.2017 Stand 20.03.2017

HOCHDORF share performance Shareholders according to breakdown at 31 December 2016

Number of shares Registered shareholders Share price development in 2016 1 – 10 225 The share price development for HOCHDORF Holding Ltd was extremely pleasing in 2016. The stock 11 – 100 1,025 achieved the second-best annual performance of all the securities listed on the SIX Swiss Exchange. 101 – 1,000 637 The most noticeable price increase took place in the fourth quarter of 2016. The price at close of trad- 1,001 – 10,000 93 ing on 30 December 2016 was CHF 309.75 (31 December 2015: CHF 168.70). That represents a price 10,001 – 100,000 17 increase of +83.6 %, while the Swiss Performance Index (SPI) recorded a zero-sum game over the 100,001 or more 1 whole of 2016. When viewed over the last five years (1.1.2012 – 30.12.2016), the price increase for Total 1,998 the HOCHDORF share amounted to +313 %. As of 31 December 2016, HOCHDORF Holding Ltd had 1,434,760 registered shares (no change over previous year). The market capitalisation also rose accordingly by +83.6 % to CHF 444.4 million (previous year: 242.0 million). Disclosure of equity holdings According to Article 120 of the Federal Act on Financial Market Infrastructures and Market Conduct + Share prices and charts in Securities and Derivatives Trading (Financial Market Infrastructure Act, FMIA), anyone who in SIX direct or indirect consultation with third parties acquires or sells on his own account the shares of a Listing www.six-swiss- company based in Switzerland, the equity holdings of which are wholly or partially listed in exchange.com HOCHDORF Holding Ltd is listed on the SIX ISIN CH0024666528 Switzerland, or of a company based abroad, the equity holdings of which are wholly or partially Swiss Exchange (ISIN CH0024666528). At the Securities number (VALOR) 2,466,652 listed in Switzerland, and thus reaches, falls short of or exceeds the limit value of 3, 5, 10, 15, 20, end of 2016, the market capitalisation was CHF Bloomberg code HOCN SW 444.4 million. 25, 33⅓, 50 or 66⅔ per cent of the voting rights, whether these are exercisable or not, must dis- Thomson Reuters code HOCN.S close this to the company and to the stock exchanges on which the equity holdings are listed.

2016 2015 2014 2013 2012 Shareholders according to category at 31 December 2016 Share capital at 31.12. TCHF 14,348 14,348 10,709 9,000 9,000

Description Registered shareholders Number of shares at 31.12. Units 1,434,760 1,434,760 1,070,922 900,000 900,000 Natural persons 1,837 Nominal value per share CHF 10.00 10.00 10.00 10.00 10.00 Legal entities 91 Profit/loss (–) per share CHF 14.12 11.73 17.45 6.95 –39.69 Pension funds 15 EBITDA per share CHF 23.25 21.23 25.40 20.11 15.91 Insurance companies 4 EBIT per share CHF 15.66 14.04 18.69 11.44 3.07 Investment company/fund 26 Cash flow (earned capital) per share CHF 22.45 17.33 23.63 20.14 15.01 Other trusts 5 Equity per share CHF 31.92 134.37 133.69 115.30 110.85 1) Banks 16 Dividend per share CHF 3.80 3.70 3.70 3.20 3.00 Public corporation 4 Peak price CHF 320.00 178.00 141.30 105.30 89.95 Total 1,998 Lowest price CHF 163.00 107.50 100.80 79.20 66.00 Price at close of trading on 31.12. CHF 309.75 168.70 138.00 104.00 88.25 Average trading volume per day Units 2,650 2,312 1,202 804 940 P/E (price/earnings ratio) at 31.12. 21.94 14.4 7.9 15.0 n.a. Dividend return % 1.23 2.19 2.68 3.08 3.40

1) Proposal of the Board of Directors to the Annual General Meeting.

04 | HOCHDORF share performance HOCHDORF share performance | 05

HOCHDORF shares 9 Stand 20.03.2017 Stand 20.03.2017

Cereals & Ingredients Business model, strategy and markets The fields of activity covered by this area came to the Group via acquisitions. The companies operate in niche markets with healthy products. The HOCHDORF Group is one of the leading food companies in Switzerland. The company operates in the areas of Milk Derivatives, Baby Care and Cereals & Ingredients. The Group’s core area of expertise › Healthy VIOGERM® wheat germ products form the centrepiece of the Cereals & Ingredients Divi- lies in developing, producing and marketing powder products based on milk and whey, as well as pro- sion of HOCHDORF Swiss Nutrition Ltd. The company occupies a leading position in the market ducing and marketing high-quality cereals. With its holding in Uckermärker Milch GmbH, HOCHDORF for stabilised wheat germ and wheat germ oil. The product range is rounded off by FEMTORP® is also active in the area of butter, buttermilk and curds in Germany. instant dessert products as well as various cereals for the baking industry. This company frequently works with its customers to develop new healthy consumer products. As an international food company, the entire Group identifies with the typically Swiss values of › Marbacher Ölmühle GmbH, Marbach (D), has been producing various organic vegetable oils and «reliability», «quality» and «precision». Today, the Group largely operates in the business-to-busi- flours since 1899. In the process, the company sets great store by the origin, quality and traceabil- + ness sector. The Group targets its products at rapidly growing, non-saturated markets. In the process, ity of its oil seeds as well as gentle processing and filling. HOCHDORF focuses on the premium product segments and offers its customers correspondingly › HOCHDORF South Africa Ltd based in Cape Town was set up in 2015. The company develops The HOCHDORF Group high benefits and service. and produces high-quality chocolate and sells it to business customers and consumers exclusively sees itself as a globally active, independent and on the African continent. The HOCHDORF Group owns a 90 % stake in this company. agile Swiss company that Dairy Ingredients is organised as a medi- The roots of the HOCHDORF Group lie in the production of different milk powders. In 2016, this Gross sales revenue by region um-sized business. division was responsible for almost three quarters of gross sales revenue. The following companies form part of the Dairy Ingredients division:

› The Dairy Ingredients Division of HOCHDORF Swiss Nutrition Ltd operates mainly in Switzer- land. With its years of experience, the company specialises in products with dairy ingredients. It is › an important supplier of cream, roller-dried whole milk powder, fat powder, milk and whey pro- Page 28 et seq. tein powder, as well as whey powder, to the (Swiss) food industry. Dairy Ingredients report › HOCHDORF Baltic Milk UAB is based in Medeikiai (Lithuania). It develops, produces and sells powder products from milk and whey. The company’s focus lies on milk filtration and milk drying processes. The majority of the products are exported. › Uckermärker Milch GmbH, Prenzlau (D), processes milk to make butter, curd and dried milk products. Buttermilk has also been filled in pots at this location since 2015. The products are mar- keted nationally and internationally. The HOCHDORF Group owns a 60 % share of this company.

Baby Care + HOCHDORF has a long tradition in the production of infant formula stretching back many years. Greater emphasis has been placed on the global focus of this division since 2006. In 2016, the HOCHDORF has been HOCHDORF Group earned around 22 % of its revenue with infant formula. manufacturing food for children since 1908. › The Baby Care Division of HOCHDORF Swiss Nutrition Ltd exports more than 90 % of its prod- Strategy 2017 – 2021 continues on the route we have chosen › ucts. The broad product range includes milk products made in Switzerland for pregnant women, Our goal is to turn HOCHDORF into a global, profitable niche company with premium products. As a Page 32 et seq. infants and young children. The products are exclusively located in the premium segment. company operating in certain niche markets, HOCHDORF wants to preserve the agility of a mid-sized Baby Care report › The HOCHDORF Group holds a 60 % stake in HOCHDORF Americas Ltd. The company sells company and show the entrepreneurial spirit required to conquer new markets. HOCHDORF infant formula in Latin American countries. Forward integration, i.e. taking a step closer to the consumer, forms an important part of the new strategy. The company is initially aiming to take this step in the Baby Care Division. Joining forces with customers in the MEA region and/or Asia represents the ideal scenario. The intention is also to establish the company’s own brands in all business areas.

06 | Business model, strategy and markets Business model, strategy and markets | 07

10 HOCHDORF Annual Report 2016 Stand 20.03.2017 Stand 20.03.2017 Stand 20.03.2017

Cereals & Ingredients CerealsThe fields & of Ingredients activity covered by this area came to the Group via acquisitions. The companies operate › Business model, strategy and markets Thein niche fields markets of activity with covered healthy by products. this area came to the Group via acquisitions. The companies operate Page 35 et seq. in niche markets with healthy products. Cereals & The HOCHDORF Group is one of the leading food companies in Switzerland. The company operates in › Healthy VIOGERM® wheat germ products form the centrepiece of the Cereals & Ingredients Divi- Ingredients report the areas of Milk Derivatives, Baby Care and Cereals & Ingredients. The Group’s core area of expertise › Healthysion of HOCHDORF VIOGERM® Swisswheat Nutrition germ products Ltd. The form company the centrepiece occupies aof leading the Cereals position & Ingredients in the marketDivi- lies in developing, producing and marketing powder products based on milk and whey, as well as pro- sionfor stabilised of HOCHDORF wheat germSwiss and Nutrition wheat Ltd.germ The oil. company The product occupies range a isleading rounded position off by inFEMTORP the market® ® ducing and marketing high-quality cereals. With its holding in Uckermärker Milch GmbH, HOCHDORF forinstant stabilised dessert wheat products germ as andwell wheat as various germ cereals oil. The for product the baking range industry is rounded. This companyoff by FEMTORP frequently is also active in the area of butter, buttermilk and curds in Germany. instantworks with dessert its customersproducts as to well develop as various new healthy cereals forconsumer the baking products. industry. This company frequently › worksMarbacher with Ölmühleits customers GmbH, to develop Marbach new (D), healthy has been consumer producing products. various organic vegetable oils and + Marbacher Ölmühle GmbH, Marbach (D), has been producing various organic vegetable oils and Page 36 As an international food company, the entire Group identifies with the typically Swiss values of › flours since 1899. In the process, the company sets great store by the origin, quality and traceabil- «reliability», «quality» and «precision». Today, the Group largely operates in the business-to-busi- flours since 1899. In the process, the company sets great store by the origin, quality and traceability of its oil seeds as well as gentle processing and filling. Three oils won an inter- ness sector. The Group targets its products at rapidly growing, non-saturated markets. In the process, ity of its oil seeds as well as gentle processing and filling. › HOCHDORF South Africa Ltd based in Cape Town was set up in 2015. The company develops national award in 2016. HOCHDORF focuses on the premium product segments and offers its customers correspondingly › HOCHDORF South Africa Ltd based in Cape Town was set up in 2015. The company develops and produces high-quality chocolate and sells it to business customers and consumers exclusively high benefits and service. and produces high-quality chocolate and sells it to business customers and consumers exclusively on the African continent. The HOCHDORF Group owns a 90 % stake in this company. Dairy Ingredients The roots of the HOCHDORF Group lie in the production of different milk powders. In 2016, this Gross sales revenue by region division was responsible for almost three quarters of gross sales revenue. The following companies form part of the Dairy Ingredients division:

› The Dairy Ingredients Division of HOCHDORF Swiss Nutrition Ltd operates mainly in Switzer- land. With its years of experience, the company specialises in products with dairy ingredients. It is an important supplier of cream, roller-dried whole milk powder, fat powder, milk and whey protein powder, as well as whey powder, to the (Swiss) food industry. › HOCHDORF Baltic Milk UAB is based in Medeikiai (Lithuania). It develops, produces and sells powder products from milk and whey. The company’s focus lies on milk filtration and milk drying processes. The majority of the products are exported. › Uckermärker Milch GmbH, Prenzlau (D), processes milk to make butter, curd and dried milk products. Buttermilk has also been filled in pots at this location since 2015. The products are mar- keted nationally and internationally. The HOCHDORF Group owns a 60 % share of this company.

Baby Care HOCHDORF has a long tradition in the production of infant formula stretching back many years. Greater emphasis has been placed on the global focus of this division since 2006. In 2016, the HOCHDORF Group earned around 22 % of its revenue with infant formula.

› The Baby Care Division of HOCHDORF Swiss Nutrition Ltd exports more than 90 % of its prod- Strategy 2017 – 2021 continues on the route we have chosen ucts. The broad product range includes milk products made in Switzerland for pregnant women, OurStrategy goal is 2017 to turn– 2021 HOCHDORF continues into on a theglobal, route profitable we have niche chosen company with premium products. As a infants and young children. The products are exclusively located in the premium segment. companyOur goal isoperating to turn HOCHDORF in certain niche into markets, a global, HOCHDORFprofitable nichewants company to preserve with thepremium agility products.of a mid-sized As a › The HOCHDORF Group holds a 60 % stake in HOCHDORF Americas Ltd. The company sells company andoperating show inthe certain entrepreneurial niche markets, spirit HOCHDORFrequired to conquerwants to new preserve markets. the agility of a mid-sized HOCHDORF infant formula in Latin American countries. company and show the entrepreneurial spirit required to conquer new markets. Forward integration, i.e. taking a step closer to the consumer, forms an important part of the new strategyForward. Theintegration, company i.e. is takinginitially a aimingstep closer to take to the this consumer step in the, forms Baby an Care important Division. part Joining of the forces new withstrategy customers. The company in the MEA is initially region aiming and/or to Asia take represents this step in the the ideal Baby scenario. Care Division. The intention Joining is forces also to establishwith customers the company’ in the MEAs own region brands and/or in all businessAsia represents areas. the ideal scenario. The intention is also to establish the company’s own brands in all business areas.

06 | Business model, strategy and markets Business model, strategy and markets | 07

Business model, strategy and markets | 07 Business model, strategy and markets 11 Stand 20.03.2017 Stand 20.03.2017 Stand 20.03.2017

Strategy and markets for Cereals & Ingredients The development and marketing of new, high value-added products represents a second major step TheStrategyCereals and & Ingredientsmarkets forDivision Cereals occupies & Ingredients a strong position in the domestic market of Switzerland towards achieving the company’s goal. The new products focus on customer benefit and offer high withThe Cereals its gently & Ingredientspressed VIOGERMDivision® occupieswheat germ a strong products. position The in challenge the domestic is to defendmarket thisof Switzerland position. added value; they include, for example, base powders for producing infant formula or instantised ® withWe intend its gently to expand pressed our VIOGERM global activitieswheat using germ ourproducts. production The challenge facility in is Marbach to defend (D) this as position.our base. milk powder. We intend to expand our global activities using our production facility in Marbach (D) as our base. Production at the oil mill in Marbach will be optimised and expanded. The company concentrates In every market, HOCHDORF positions itself as a specialist with its products. Proximity to its part- Production at the oil mill in Marbach will be optimised and expanded. The company concentrates primarily on organic vegetable oils and specialist flours made from the press cake. We demand high ners and its high degree of flexibility enables HOCHDORF to differentiate itself from other market primarily on organic vegetable oils and specialist flours made from the press cake. We demand high quality when it comes to raw materials and so we work closely with our raw materials suppliers. In participants through its integrated product and marketing concepts. In order to attain the goals it quality when it comes to raw materials and so we work closely with our raw materials suppliers. In has set itself, every business unit will develop such premium products and use them to establish this way we are able to guarantee maximum traceability. itself in its target markets. On the product side, Cereals & Ingredients is preparing to enter the Kids’ Food area. The demand for + On the product side, Cereals & Ingredients is preparing to enter the Kids’ Food area. The demand for The aspiration to operate in premium segments is matched by correspondingly high quality stan- healthy, tasty food for children and the need for customers to extend their product range are gathering dards in HOCHDORF’s production facilities. The aim here is to optimise production processes and strength. With its VIOGERM® wheat germ products and various organic vegetable oils, HOCHDORF More at: strength. With its VIOGERM wheat germ products and various organic vegetable oils, HOCHDORF www.hochdorf.com/en/ quality assurance. The efficiency of existing processes is regularly reviewed by means of key indica- has built a solid base upon which to service these needs. The products will be sold under our own company/quality tors. A further objective involves optimising the supply chain throughout the entire Group. brand and also as business-to-business products in existing partner networks.

The HOCHDORF Group is aware that many natural resources and a lot of energy are required to Distribution gross sales revenue › produce its products. We aim to treat all resources sustainably and in ways that are environmentally Page 103 et seq. friendly. Among other things, we make sure that plants are highly energy-efficient when we com- Energy consumption mit to new investments.

Strategy and markets for Dairy Ingredients › The aim is for the Dairy Ingredients business to develop on a sustainably global level from a strong Page 28 et seq. Swiss base. Cooperation between the four milk plants, Hochdorf, Sulgen, Prenzlau and Medeikiai, will be optimised to the greatest extent possible and the product portfolio sensibly combined. Dairy Ingredients report

We intend to defend our market position in Switzerland, including in the area of roller-dried whole milk powder. As a Swiss expert for roller-dried whole milk powder, we are planning to make global capital from this knowledge. At the same time, we want to develop, produce and market new products with high added value across all our production plants. We position new HOCHDORF products as a premium alternative with corresponding service in the markets.

The aim with all our activities is to pay attention to the various underlying conditions and build them sensibly into the operational implementation process. Milk procurement represents an important element here. It is to be adapted to fit with the requirements of the production facilities.

Strategy and markets for Baby Care The Baby Care Division is globally structured and we plan for it to achieve further growth with existing customers in Asia, the Near East and Africa. We are looking for new partners, above all in › the emerging markets of Latin America and in larger Asian countries where HOCHDORF is not yet Page 32 et seq. operating. As a USP, along with Swissness, we want to be able to continue offering our customers a Baby Care report modern and complete product range of children’s nutritional specialities in line with our premium strategy. In the medium term, the Baby Care Division wants to get closer to the consumer in the value chain with its own brands in selected markets (keyword: forward integration).

On the production side, we are seeking to optimise existing capacity for the production of infant formula. At the same time, we will adapt production capacity to meet the high demand. The new spray drying tower line for manufacturing and filling Swiss-made infant formula in Sulgen is expected to start operating in the first quarter of 2018.

At our Prenzlau facility, we are planning to produce basic products for infant formula production to meet market demand. Several global partners are interested in such high-quality products for manufacturing infant formula. Production of these base powders represents a first step in establishing the expertise to produce infant formula at the Prenzlau facility.

08 | Business model, strategy and markets Interview «With the forward integration we are also now responsible for brands.» | 09

Interview «With the forward integration we are also now responsible for brands.» | 09 12 HOCHDORF Annual Report 2016 Stand 20.03.2017 Stand 20.03.2017 Stand 20.03.2017

Strategy and markets for Cereals & Ingredients › The development and marketing of new, high value-added products represents a second major step TheStrategyCereals and & Ingredientsmarkets forDivision Cereals occupies & Ingredients a strong position in the domestic market of Switzerland Page 35 et seq. towards achieving the company’s goal. The new products focus on customer benefit and offer high The Cereals & Ingredients Division® occupies a strong position in the domestic market of Switzerland with its gently pressed VIOGERM wheat germ products. The challenge is to defend this position. Cereals & Ingredients added value; they include, for example, base powders for producing infant formula or instantised ® withWe intend its gently to expand pressed our VIOGERM global activitieswheat using germ ourproducts. production The challenge facility in is Marbach to defend (D) this as position.our base. report milk powder. We intend to expand our global activities using our production facility in Marbach (D) as our base. Production at the oil mill in Marbach will be optimised and expanded. The company concentrates In every market, HOCHDORF positions itself as a specialist with its products. Proximity to its part- Production at the oil mill in Marbach will be optimised and expanded. The company concentrates primarily on organic vegetable oils and specialist flours made from the press cake. We demand high ners and its high degree of flexibility enables HOCHDORF to differentiate itself from other market primarily on organic vegetable oils and specialist flours made from the press cake. We demand high quality when it comes to raw materials and so we work closely with our raw materials suppliers. In participants through its integrated product and marketing concepts. In order to attain the goals it quality when it comes to raw materials and so we work closely with our raw materials suppliers. In has set itself, every business unit will develop such premium products and use them to establish this way we are able to guarantee maximum traceability. itself in its target markets. On the product side, Cereals & Ingredients is preparing to enter the Kids’ Food area. The demand for The aspiration to operate in premium segments is matched by correspondingly high quality stan- healthy, tasty food for children and the need for customers to extend their product range are gathering dards in HOCHDORF’s production facilities. The aim here is to optimise production processes and strength. With its VIOGERM® wheat germ products and various organic vegetable oils, HOCHDORF quality assurance. The efficiency of existing processes is regularly reviewed by means of key indica- has built a solid base upon which to service these needs. The products will be sold under our own tors. A further objective involves optimising the supply chain throughout the entire Group. brand and also as business-to-business products in existing partner networks.

The HOCHDORF Group is aware that many natural resources and a lot of energy are required to Distribution gross sales revenue produce its products. We aim to treat all resources sustainably and in ways that are environmentally friendly. Among other things, we make sure that plants are highly energy-efficient when we com- mit to new investments.

Strategy and markets for Dairy Ingredients The aim is for the Dairy Ingredients business to develop on a sustainably global level from a strong Swiss base. Cooperation between the four milk plants, Hochdorf, Sulgen, Prenzlau and Medeikiai, will be optimised to the greatest extent possible and the product portfolio sensibly combined.

Strategy and markets for Baby Care The Baby Care Division is globally structured and we plan for it to achieve further growth with existing customers in Asia, the Near East and Africa. We are looking for new partners, above all in the emerging markets of Latin America and in larger Asian countries where HOCHDORF is not yet operating. As a USP, along with Swissness, we want to be able to continue offering our customers a modern and complete product range of children’s nutritional specialities in line with our premium strategy. In the medium term, the Baby Care Division wants to get closer to the consumer in the value chain with its own brands in selected markets (keyword: forward integration).

08 | Business model, strategy and markets Interview «With the forward integration we are also now responsible for brands.» | 09

Interview «With the forward integration we are also now responsible for brands.» | 09 Business model, strategy and markets 13 Stand 20.03.2017 Stand 20.03.2017

«With the forward integration we are also now responsible for brands.»

Dr Thomas Eisenring, the 2016 business year is now one for the books. How satisfied are you with the business year as a whole? › Fundamentally, I am very satisfied. However, I am of the opinion that we could have done even better.

What circumstances prevented even better results? › It is no secret that we had to deal with very difficult market conditions in the EU; we, too, are not immune to them. We reduced volumes there in order to avoid the worst. Furthermore, we incurred restructuring costs at Marbacher Ölmühle, which we did not anticipate.

Despite the difficult market conditions, the financial results of the HOCHDORF Group were better than ever before in its history. What factors led to these outstanding results? › The most important factor was very certainly the strong results at HOCHDORF Swiss Nutrition. All three business divisions made a contribution to the good earnings, with the results in the Cereals & Ingredients and Baby Care divisions coming in significantly above expectations. We were able to How are you planning to integrate the Pharmalys companies in the HOCHDORF Group? increase our productivity once again. And what new tasks must HOCHDORF specifically overcome? What, in brief, were the specific challenges in the three business divisions, Dairy Ingredi- › Fundamentally, I do not like this term «integration of Pharmalys in the HOCHDORF Group». ents, Baby Care and Cereals & Ingredients? Pharmalys will not become HOCHDORF or vice-versa. A new company will emerge out of this that › In the Dairy Ingredients division, we had somewhat less milk in Switzerland in the second half of wants to generate value for all involved parties. The important thing is that we integrate all adminis- the year, and it was not always easy to fulfil all customer contracts. In the EU we had to deal with trative processes at HOCHDORF and safety-relevant aspects are controlled and monitored. Our cor- extreme price fluctuations, e.g. in the area of cream and butter, which made profitable business porate governance must naturally also apply to all. If, however, it is a matter of marketing infant impossible, above all in the second half of the year. formula in countries in the MEA region, then it involves processes that we can hardly affect.

In the Baby Care division we also had difficulties with our capacities again this year, but we were Can the distribution channels from Pharmalys be used for other HOCHDORF products? If able to achieve and sell one month’s more production than in the prior year; since everyone did a yes, for what products is that planned? good job. Otherwise, the new Food Safety Law in China kept us on tenterhooks that importing › Yes, and work is well under way here. One of the most important projects for me is the develop- infant formula would be much more difficult. ment of instant milk that is also consumed after baby age. Here, however, we still have some work to do. In April, HOCHDORF South Africa will have diabetes chocolate ready for the market, and it In the Cereals & Ingredients division, we face very important decisions. In 2016, Cereals & Ingredi- will be sold through the Pharmalys distribution network. In the Cereals & Ingredients division, there ents generated outstanding results; certain contracts, however, will run into the future, and we gave will be numerous other products that are suited for sales through this network; they include, for strategic consideration in 2016 to various options with regard to how the division should be devel- example, our healthy crisps and dietary supplements. oped in future. When we have the right business model here, it could become a big thing. Internationalisation always has a human component. HOCHDORF will turn into an inter- The forward integration is an important part of the strategy, and a first step was taken cultural company. To what extent will this affect the corporate culture of HOCHDORF? with the majority stake in Pharmalys. What impact will this majority stake have on › Today we are already an inter-cultural company; this will clearly become more intensive, but is HOCHDORF? fundamentally nothing new for us. The different perspectives resulting from the various business › With the acquisition of the majority stake in Pharmalys, we are also now responsible for the brands models are much more interesting. As we formulated the press release upon closing the deal, I paid «Primalac» and «Swisslac»; our responsibility has therefore increased significantly. We will also have attention, for example, to meeting the requirements according to stock corporation law, while Amir to deal with these brands and develop them; that is new for HOCHDORF. On the other hand, we will Mechria, the Managing Director of Pharmalys, also saw it as a promotional message. see big changes in margins; I am assuming that our absolute EBIT will rise significantly this year.

10 | Interview «With the forward integration we are also now responsible for brands.» Interview «With the forward integration we are also now responsible for brands.» | 11

14 HOCHDORF Annual Report 2016 Stand 20.03.2017 Stand 20.03.2017

«With the forward integration we are also now responsible for brands.»

10 | Interview «With the forward integration we are also now responsible for brands.» Interview «With the forward integration we are also now responsible for brands.» | 11

Interview 15 Stand 20.03.2017 Stand 20.03.2017

Key word Strategy 2016 – 2020: How satisfied are you with the implementation – inde- The foreign plants in Dairy Ingredients enjoyed a strong tailwind in 2016. What measures pendently of the forward integration? are taken so that these plants will also be able to withstand market changes in future? › I am not very satisfied with the result of our product offensive, even if we can celebrate some › Fundamentally, it is very difficult in the EU to react quickly enough to market conditions, above limited success. But we should not forget that we are using a limited number of resources and doing all, if the volatility is as great as it was last year. Since we are not organised as a cooperative things we have never done before and doing them in a technical environment that we are not (Genossenschaft) and cannot compensate with the milk price, there is only one long-term solution: entirely familiar with. But Rome was not built in one day. we must manufacture products with higher added value.

The can lines and tower 8 areas have developed well. At Niro 4 in Hochdorf, we have somewhat You want to increase investments in Kids’ Food and in your own brands in the Cereals & rolled back capacity utilisation for the benefit of food safety, which has also increased efficiency as Ingredients division. What are the next steps and what is to be expected in the current measured on the good end product, however. Where I still see potential is in purchasing; we must business year? also improve there. › We need a location in the EU for the Cereals & Ingredients division. In Switzerland, we have more than double the costs that we have in Germany, for example. Furthermore, we must have all What is the strategic focus for HOCHDORF in 2017? the technologies in our own company for Kids’ Food products, preferably even in the same plant. › Fundamentally, we will systematically continue our Strategy 2016 – 2020. In 2017, I see us We are in the evaluation phase of various alternatives and I hope that we will be able to put our focusing on cross-selling in the Pharmalys network, developing the business model in the Cereals & money where our mouth is this year. Ingredients division, and ensuring the systematic profitability of the Dairy Ingredients division across all locations. The Marbacher Ölmühle has belonged to the HOCHDORF Group since 2015. How is the plant integrated into the Group, and what is still needed? In the area of infant formula, HOCHDORF is investing in a new spray tower line for the › The Marbacher Ölmühle was basically a construction site in 2016; a good example of the fact that production of high-quality infant formula. The line should be ready for production in the acquisitions can have their pitfalls despite serious due diligence. For the most part, we have replaced first quarter of 2018. When will the new spray tower line operate at full capacity? What half the staff and completely changed the order structure. With the current set-up, I am of the opin- measures are being taken so that the tower can be filled as quickly as possible? ion that Marbacher Ölmühle will achieve its targets. › We assume that the new tower will run at full capacity in 2022. We can expand certain projects such as the tenders in Egypt, but we also have a very promising project pipeline. Furthermore, we With the forward integration, the risks for the HOCHDORF Group have also certainly have created the position of Chief Sales Officer, which does not deal with anything other than new increased. What do you think are the greatest risks that HOCHDORF has to face? customer acquisition. › I am often asked this question and have my own opinion on this. Fundamentally, it is correct that our players are strewn across the entire world, and we assume responsibility for our own Where are the greatest opportunities, risks and challenges in the Baby Care division in 2017? brands. At first, this sounds riskier than before. But another critical aspect changed with the forward › Fundamentally, we have gained the greatest opportunities in this area with the acquisition of the integration: in the past, Pharmalys was simply one of our customers and we had minimal influence. majority stake in Pharmalys. Today, we have direct influence on all of Pharmalys’s activities and can co-shape the entire development; I feel a lot better as a result of this. A challenge that we can handle quite well, however, is that of formulations. We must change them so that they are in compliance with the new requirements for the EU and are state-of-the-art from a I see the greatest risks as lying elsewhere. After the decision to invest in more capacity for the pro- scientific perspective. We are also focusing on increasing capacity, process optimisation of the facili- duction of infant formula in Switzerland rather than in Germany, a new business model had to be ties and the preparatory work for process development of the new production line. found for our plant in Prenzlau. Today, the plant operates with almost 200 million in turnover and is thus close to the red. That is risky. Furthermore, I am worried about the labour market in Switzer- The new regulation in China is not quite without risks. It stipulates that, in future, every brand land. It is becoming increasingly difficult to find qualified staff who want to work in four-shift oper- available on the market must undergo an approval procedure. This procedure will be introduced this ations. year and it involves some uncertainties. In addition, the registration process for each individual brand is relatively elaborate. In addition to strategic projects, the daily business will continue. Can you sum up what the market and order situation is like in the individual business areas? In the Dairy Ingredients division, HOCHDORF wants to increasingly invest in special › The order situation is good in all areas. Obtaining orders is usually not the problem; a much more powder such as instant milk powder, for example. Where are these products produced critical question is the price. I am not expecting any quantity or price surprises in 2017. and for what markets are they interesting? › We can produce less complex powder for industrial applications in Prenzlau. We expect that we will be able to use the existing special towers from partners for high-quality powder in the business-to-customer area. There is enough spraying capacity on the market, and we do not need to develop our own to start with.

12 | Interview «With the forward integration we are also now responsible for brands.» Interview «With the forward integration we are also now responsible for brands.» | 13

16 HOCHDORF Annual Report 2016 Stand 20.03.2017 Stand 20.03.2017

12 | Interview «With the forward integration we are also now responsible for brands.» Interview «With the forward integration we are also now responsible for brands.» | 13

Interview 17

«Snacking is and always has been part of our eating culture. In evolutionary terms, snacking has been a natural habit since time immemorial.»

18 HOCHDORF Annual Report 2016 CEREALS & INGREDIENTS «Healthy Snacking – a recent phenomenon that’s here to stay.»

Snacking is not a phenomenon of the 21st century; it is deeply rooted in our culture. Even our ancestors nib- bled between meals or ate their kill as the opportunity arose. The main difference between snacking then and our habits today relates to the easy availability of snacks and the raw materials they contain.

We have always liked to snack. For thousands of years, we didn‘t really take regular meals; we ate when we were hungry and relied on our good fortune as hunter-gatherers. Man foraged and hunted and ate on the spot. The switch from many frequent meals to at least two fixed meal times per day was a relatively recent development in our history – presumably around 7,000 years ago with the advent of agriculture and livestock breed- ing. With the industrialisation of the 19th century, however, the system of fixed meals shifted towards individualised snacking. What was still missing was the freedom we have today to decide when and what we want to eat. Eating habits were primarily determined by external assembly lines, shift plans and time clocks.

The next radical changes in our eating habits came in the 21st century with its advances in digital technologies. They have simplified and trans- formed almost every aspect of our lives: we can now simultaneously work, learn, pursue social activities and even order a pizza via the web, regardless of where we are or the time of day.

Digitisation leads to individualised eating habits The amount of time we have for work and our private lives varies from person to person. This greater individualisation is now having a huge influence on our eating habits. The preparation of the three traditional meals is now facing competition from more attractive propositions. Taking time to cook and eat fixed meals is increasingly seen as an unnecessary burden to be avoided. So healthy snacks are the perfect solution today: they free us from time-consuming preparation, waiting time and formal, structured eating ri- tuals. The new, more informal structure of snacking is liberating, relaxed and made for the 21st century.

We eat as the opportunity arises: sitting down or on our feet, with our without cutlery, alone at our office desk or with friends or strangers at a fast food outlet. Whenever works for us.

Insight Cereals & Ingredients 19

«Snacks increasingly replace traditional meals. The rising demand for natural products with added value is evidence that those championing snacks are also promoting healthy eating.»

20 HOCHDORF Annual Report 2016 babyCEREALS care & INGREDIENTS «Consumers who replace main meals with healthy snacks are promoting their well-being.»

Increasing numbers of people are interested in healthy eating and keeping their weight down. Over 50 per cent of modern snack consumers choose products with additional health benefits. These include snacks that provide the body with proteins, fibre and vitamins.

We can tell that healthy snacks are on trend To avoid malnutrition, experts in geriatrics re- without conducting any research: new snack commend taking several snacks as a form of pre- products with health benefits are available vention. It is therefore important to incorporate almost every week through retailers, health snacks into the daily ritual of older people. shops and websites. And the survey data for international market and consumption studies Snacks throughout the day reduce hunger confirms our subjective perception of reality. pangs There are specific benefits in supplementing According to a global survey by the Nielsen Ins- main meals with snacks. If the gaps in our food titute, 43 per cent of those questioned preferred consumption are too big, we risk low blood su- snacks made from natural ingredients. Around gar. Hunger pangs ensue and can lead to binge a third of all those interviewed said it was im- eating, which is not associated with a healthy portant that their snacks contained as little su- approach to eating. Smaller portions do not gar, salt, fat and calories as possible. They also stretch our stomach as wanted more fibre, protein and whole grain. much as bigger portions so Consumers who replace their main meals with the stomach is slower to healthy snacks may even be promoting their empty. As a result, the hor- well-being. mones that regulate appetite are released more stea- Children and old people need healthy dily and the blood sugar snack options and insulin concentration is A child‘s capacity to store energy is smaller than more balanced. it is for adults. Healthy snacks are therefore important for children in particular because they People who snack stay supply the regular energy intake they need to more physically and men- stay fit and maintain concentration. tally productive and may even have more energy. Snacks are as important for old people as they More is sometimes less. are for children. Beyond a certain age there is a fall in our appetite and desire to take in liquid.

Insight Cereals & Ingredients 21

CEREALS & INGREDIENTS «Our ingredients meet the current demand for healthy snack products.»

Centre of competence for healthy snacks What is the significance of the trend to healthy, natural snacks for our Cereals & Ingredients division? It is a positive development with interesting market opportunities – we have been producing healthy products with natural ingredients for people of all ages for over 100 years. Which makes us a centre of competence for healthy snacks. We don‘t need to change our image or break new ground; we just need to keep doing what we have always done: developing and offering high- quality products with added value.

Like our new added-value VIOGERM® High Protein Crisps, manufactured using Vegan and protein-rich an extrusion process and enriched with additional vegetable proteins from wheat ingredients are on trend and rice. The crisps have a protein content of up to 70 per cent – creating a real protein power house. The demand for protein-rich snacks is on the rise. More than Healthy eating with style 3000 new products claiming to Completely new products in our range include superfood crisps with teff and be «high in protein» were laun- quinoa as well as paleo crisps made of chestnut flour, with or without chia seeds. ched on the market in 2016. The paleo crisps are based on the diet of our hunter-gatherer ancestors, which was The demand for vegetable pro- rich in proteins and dietary fibre. More and more people are basing their eating tein is not just restricted to vegans and vegetarians. habits on this philosophy, recognising the positive effects the paleo diet can have on weight, health and performance. You can snack on the paleo and superfood People increasingly describe crisps as they are or mix them with muesli. They have no added sugar or artificial themselves as flexitarians or ingredients. part-time vegetarians. For the sake of their health and the en- One of our companies offering high-quality ingredients for producing on-trend vironment, they reduce their snacks is Marbacher Ölmühle, with its range of special flours produced from oil consumption of meat in parti- seeds. Some of these are gluten-free and lactose-free, making them ideal for vegan cular, which is naturally high in snacks. The flour made from sunflower seeds has a nutty taste and a very high protein, and look for alternative protein content of over 50 per cent. It is perfect for light baking mixtures and low- plant sources. As a producer of carb products. Flour produced from linseed is another interesting ingredient for vegetable and milk-based in- low-carb snacks. It is rich in fibre and contains virtually no carbohydrate. gredients, we see this as a positive development. Whether we are fans of snacks or not, there is no doubt their momentum is un- stoppable. What is positive, however, is that we are in an age where snack consumers increasingly focus on healthy products. And young parents place more value on healthy snacks for their children. Our Kids’ Food project is a major priority for us. At HOCHDORF we look forward to actively supporting both young and old with healthy nutrition.

22 HOCHDORF Annual Report 2016 «No study has so far shown a general and direct correlation between snacking and obesity.»

Insight Cereals & Ingredients 23 Stand 20.03.2017

Financial Report

Income statement: Operational section + 2016 was the year of constantly falling milk prices in the EU and a large price difference between the price of milk there and in Switzerland. Fluctuations in international commodity prices had a We were able to exceed major negative impact on the results of foreign subsidiaries. The Swiss market could not escape from the operational targets. this turbulence. Lower quantities of milk and heavy reliance on the «Schoggi Law» were a conse- quence of these distortions on the market. This meant that the HOCHDORF Group was not able to meet its expected figures with regard to turnover due to quantity and price effects. Fortunately, however, the Group was able to not just achieve but even outperform in terms of its more important operational targets.

Primarily the Baby Care Division, in which our high-quality products are not as price sensitive, contributed to the good domestic results. The utilisation of capacity increased again thanks to technical improvements. Furthermore, the improvement in the product mix led to very good earnings figures.

In the Cereals & Ingredients Division, we were able to achieve additional success by making adjust- ments and generating profits with new major customers. In Switzerland, the profits from prior years continued and even increased. Abroad, development and expansion is more intensive and is taking longer than expected. This part reported a loss. However, appropriate measures have been introduced so that it will be possible to achieve positive numbers in this division as of 2017.

Thanks to the strong Swiss business, there was a higher percentile gross profit (25.2 %) than in the previous year (23.9 %) despite weak margins in business abroad at Group level. However, the recent nominal increase in the gross profit to CHF 136.8 million is more critical (PY CHF 130.1 million). Gross turnover rose minimally to CHF 551.5 million (PY CHF 551.2 million). We reached a record EBITDA level in the reporting year with CHF 33.4 million (PY CHF 30.5 million). The EBIT result was CHF 22.5 million (PY CHF 20.1 million) with higher amortisations of CHF 10.9 million in 2016 (PY CHF 10.3 million).

In the reporting year, the main plants once again performed at a very high level and ran close to full capacity. In 2017 an attempt will be made to increase overall production again with technical adjust- ments and the purchase of partial quantities. The new capacities (tower 9) are urgently needed in ! order to keep up with the sharp growth in our customers. The target values for operating expenses were largely met. Personnel expenses were higher, largely due to the higher staffing levels required. Operating expenses have come in above internal targets. The main reason for this was higher space and logistics costs as well as higher sales commissions.

Financial results A still strong, but somewhat more stable Swiss franc, lower interest rates on borrowed capital and one-off interest income from offsetting extended payment terms and income from equity investments led to a slightly negative financial result overall. In comparison to the previous year, there was an improvement of almost CHF 5 million. The syndicated loan was renewed in 2016 and doubled in total.

Financial Report | 01

24 HOCHDORF Annual Report 2016 Stand 20.03.2017 Stand 20.03.2017

Financial Report

Income statement: Operational section 2016 was the year of constantly falling milk prices in the EU and a large price difference between the price of milk there and in Switzerland. Fluctuations in international commodity prices had a major negative impact on the results of foreign subsidiaries. The Swiss market could not escape from this turbulence. Lower quantities of milk and heavy reliance on the «Schoggi Law» were a conse- quence of these distortions on the market. This meant that the HOCHDORF Group was not able to meet its expected figures with regard to turnover due to quantity and price effects. Fortunately, however, the Group was able to not just achieve but even outperform in terms of its more important operational targets.

In the Dairy Ingredients Division, the situation is increasingly difficult and competitive. This also increasingly applies to domestic sales. Much effort is needed in order to maintain the quantities and margins. Despite the very difficult situation regarding the «Schoggi Law», there was no need for write-downs or additional expenditures. Income taxes Tax costs on the operating result were in line with expectations. In the reporting year, deferred taxes In the Cereals & Ingredients Division, we were able to achieve additional success by making adjust- on newly incurred tax losses in the foreign companies were capitalised. ments and generating profits with new major customers. In Switzerland, the profits from prior years continued and even increased. Abroad, development and expansion is more intensive and is taking Cash flow and financing longer than expected. This part reported a loss. However, appropriate measures have been introduced In comparison to the previous year, cash flow from operating activities has risen from CHF 19.0 mil- so that it will be possible to achieve positive numbers in this division as of 2017. lion to CHF 24.2 million. Earned capital increased from CHF 24.9 million to CHF 32.2 million, the main reason being the better operating business and the improvement in the financial result. Thanks to the strong Swiss business, there was a higher percentile gross profit (25.2 %) than in the Despite the expansion of business activities, receivables and inventories remained within a reason- previous year (23.9 %) despite weak margins in business abroad at Group level. However, the recent able range. nominal increase in the gross profit to CHF 136.8 million is more critical (PY CHF 130.1 million). Gross turnover rose minimally to CHF 551.5 million (PY CHF 551.2 million). We reached a record In the area of investments, more than CHF 43.2 million was spent on plant/buildings/software. The EBITDA level in the reporting year with CHF 33.4 million (PY CHF 30.5 million). The EBIT result serious investments could be financed from the ongoing cash flow by leaving out the contributions was CHF 22.5 million (PY CHF 20.1 million) with higher amortisations of CHF 10.9 million in 2016 for an expansion of the Sulgen plant. In 2017, investments have continued to be made in more (PY CHF 10.3 million). capacities (tower 9/can line/Laglo 2).

In the reporting year, the main plants once again performed at a very high level and ran close to full As expected, free cash flow was negative in 2016. We also anticipate negative free cash flow in 2017 capacity. In 2017 an attempt will be made to increase overall production again with technical adjust- due to the investments in the expansion of capacity. ! ments and the purchase of partial quantities. The new capacities (tower 9) are urgently needed in order to keep up with the sharp growth in our customers. The target values for operating expenses Net debt increased from CHF 21.3 million in December 2015 to CHF 213.5 million. The main reason for were largely met. Personnel expenses were higher, largely due to the higher staffing levels required. this is the outstanding purchase price debt for the acquisition of the Pharmalys companies. This amount Operating expenses have come in above internal targets. The main reason for this was higher space will fall to a more normal level after the conversion of the mandatory convertible bonds. The heavy + and logistics costs as well as higher sales commissions. investment activity for the expansion of capacity contributed to the increase. The equity ratio fell from 56.6 % at the end of 2015 to 10.8 %. This was because the goodwill from the acquisition of the Phar- The mandatory convertible bond is entirely cre- Financial results malys companies was offset directly against equity. This amount will be rebalanced as of 31 March 2017, dited as equity capital. A still strong, but somewhat more stable Swiss franc, lower interest rates on borrowed capital since the mandatory convertible bonds can be offset in full as equity. The HOCHDORF Group’s financing and one-off interest income from offsetting extended payment terms and income from equity continues to provide a solid basis for the company’s continued growth. investments led to a slightly negative financial result overall. In comparison to the previous year, there was an improvement of almost CHF 5 million. The syndicated loan was renewed in 2016 and Marcel Gavillet doubled in total. CFO

01 Financial Report | 02 | Financial Report

Financial report 25 Stand 20.03.2017

Key figures of the HOCHDORF Group

TCHF 2016 2015 2014 2013 2012

Processed milk and whey in tonnes 741,769 761,240 506,963 454,647 442,350 Quantities produced incl. cream in tonnes 236,179 241,754 99,720 89,631 87,518 Turnover (gross sales revenue) 551,476 551,208 428,689 376,145 346,614

Earnings before interest, tax, depreciation and amortisation (EBITDA) 33,360 30,455 27,197 18,099 14,318 as % of production revenue 6.1 % 5.6 % 6.4 % 4.9 % 4.2 %

Earnings before interest and taxes (EBIT) 22,464 20,146 20,016 10,298 2,759 as % of production revenue 4.1 % 3.7 % 4.7 % 2.8 % 0.8 %

Earnings before taxes 22,377 15,137 17,849 6,328 -35,402 as % of production revenue 4.1 % 2.8 % 4.2 % 1.7 % -10.5 %

Net profit 19,406 13,024 16,139 6,063 -35,326 as % of production revenue 3.6 % 2.4 % 3.8 % 1.6 % -10.4 %

Personnel expenses 47,796 46,227 34,802 31,720 32,456 as % of production revenue 8.8 % 8.5 % 8.2 % 8.5 % 9.6 %

Depreciation on property, plant and equipment 10,386 9,972 6,782 7,086 10,842 as % of average net inventory 5.6 % 6.2 % 6.1 % 6.5 % 8.2 %

Investments in fixed assets 42,217 22,211 16,952 3,957 8,679 as % of production revenue 7.8 % 4.1 % 4.0 % 1.1 % 2.6 %

Earned capital 32,213 24,870 25,310 18,126 13,507 as % of net sales revenue 5.9 % 4.6 % 6.0 % 4.9 % 3.9 %

Cash flow from operating activities (cash flow) 24,227 19,011 20,546 18,196 15,372 as % of net sales revenue 4.5 % 3.5 % 4.9 % 4.9 % 4.5 %

Free cash flow (loss) –33,519 –3,736 –11,903 13,846 7,134 Equity ratio 10.8 % 56.6 % 43.2 % 42.6 % 41.6 % Interest coverage (EBIT/interest expense net) 19.2 11.0 8.6 3.1 0.7 Number of shares, outstanding, in units 1,434,760 1,434,760 1,070,922 900,000 900,000 Earnings per share in CHF 14.12 11.73 17.45 6.95 -39.69 Cash flow (earned capital) per share in CHF 22.45 17.33 23.63 20.14 15.01 Dividend 38 % 37 % 37 % 32 % 30 % Payout ratio 27.35 % 39.26 % 24.55 % 47.50 % n.a. Share price as of 31.12 in CHF 309.75 168.70 138.00 104.00 88.25 Dividend return 1.23 % 2.19 % 2.68 % 3.08 % 3.40 % Price/earnings (P/E) ratio 21.9 14.4 7.9 15.0 n.a. Market capitalisation 444,417 242,044 147,787 93,600 79,425 Staffing levels as of 31.12 633 625 573 362 381

Key figures of the HOCHDORF Group | 03

26 HOCHDORF Annual Report 2016 Stand 20.03.2017 Stand 01.04.2016

Key figures of the HOCHDORF Group

TCHF 2016 2015 2014 2013 2012 2016 focused on forward integration and the product initiative. The majority stake taken in Processed milk and whey in tonnes 741,769 761,240 506,963 454,647 442,350 Quantities produced incl. cream in tonnes 236,179 241,754 99,720 89,631 87,518 the Pharmalys companies is a key step for Turnover (gross sales revenue) 551,476 551,208 428,689 376,145 346,614 forward integration. The launch of healthy vegetable flours by Marbacher Ölmühle and the Earnings before interest, tax, depreciation and amortisation (EBITDA) 33,360 30,455 27,197 18,099 14,318 first Kids´ Food products are among the successes as % of production revenue 6.1 % 5.6 % 6.4 % 4.9 % 4.2 % of the product initiative.